Dealpolitik: Twitter Zags With Only One Class of Stock

The most interesting thing about Twitter’s governance structure is what it is missing. There is only one class of common stock.

The trend among major technology companies going public is to have two classes of stock. The class offered to the public has one vote per share. The class owned by management and, in some cases, other early investors has multiple votes per share. In the case of Groupon, each share of the super-voting shares is entitled to 150 votes. Facebook’s and Google’s super-voting shares get ten votes per share.

By using super-voting shares, management can potentially keep control of a company pretty much permanently. If someone offers to buy the company and the owners of a majority of the outstanding shares want to see the company sold, the company cannot be sold unless sufficient holders of the super-voting shares can be convinced to vote yes. Similarly, the super-voting shares can be used to ensure that directors cannot be displaced– at least until they have disposed of sufficient super-voting shares that the insiders’ lock on control lapses.

But Twitter has no super-voting class of shares, according to the IPO filing it made Thursday. Each share gets only one vote. So ultimately, the holders of a majority of shares will be able to control the destiny of the company.

It is not that Twitter is missing state-of-the-art takeover protections. It has pretty much the full boat of those protections other than the super-voting stock. The anti-takeover measures include:

• A staggered board, which means directors will serve three-year terms with about a third elected each year. Thus it would take two annual meeting for the majority of shares to vote to change a majority of the board.
• Shareholders cannot call a special meeting, so the only way shareholders can act is at the annual meeting, and advance notice provisions apply to any action to be proposed.
• The charter prohibits action by consent. If the charter did not do that, in lieu of a meeting, the holders of a majority of the shares could act without a meeting by signing consents.
• The charter authorizes so-called “blank check” preferred shares. That means the board can issue preferred stock and set the terms, including dividend rights, liquidation preferences and voting rights at the time of issuance.

None of these anti-takeover provisions is unusual for IPOs. However, some of them are not popular with institutional investors. As Twitter said in its disclosure, these provisions “may have the effect of delaying, deferring or discouraging another person from acquiring control of our company.” Staggered boards can make takeovers take well over a year, but they cannot completely prevent them. Two classes of stock, with one having super-voting rights, could completely stop a takeover and guarantee management control. The Harvard Shareholder

Rights Project, together with various institutional investors, is trying to use shareholder proposals to pressure companies to eliminate staggered boards, with success in some cases.

We don’t know why Twitter did not include a second class of stock with super votes. It may not indicate any kind of altruistic devotion to shareholder democracy. It may just be an indication that Twitter’s early management either didn’t ask early investors for the founders and other insiders to have this lock on control, or it they didn’t have the bargaining power to get super-votes.

But regardless of the reason, Twitter bucking the trend of giving founders super-voting stock may make it a bit harder for the next technology IPO to include such a feature. And that is all to the good.